Technology

Apple Cash Hoard Depressing Stock Price, Einhorn Says

Apple investor David Einhorn, here in 2011 photo after he almost bought a stake in the New York Mets, released his plan for Apple iPrefs. AP View Enlarged Image

Apple (AAPL) has done a poor job of managing its $137 billion cash hoard and its stock price has suffered as a result, hedge fund manager David Einhorn charged Thursday.

In a conference call with investors and media, Einhorn, founder and president of Greenlight Capital, an Apple shareholder, detailed his proposal for Apple to unlock shareholder value by issuing preferred stock he called "iPrefs," in a nod to Apple product names.

The preferred shares would be issued to existing shareholders and would be attractive to investors seeking safe income, Einhorn says. They would pay perpetual dividends and provide a yield better than government and high-quality corporate bonds, he says.

Perpetual preferred stock is a superior alternative for unlocking Apple shareholder value than usual dividend increases and stock buybacks, he says. And it wouldn't impinge on Apple's business plan.

Einhorn is waging a public campaign to block the passage of a proposal in Apple's proxy, which would eliminate preferred stock from Apple's charter. Apple's annual shareholders meeting is Wednesday. He's also sued Apple in federal court to block a shareholder vote on the proposal, which he says does not conform to SEC rules.

Apple may be innovative with its products, but not in managing its cash and securities, Einhorn says. That cash "exceeds the market capitalization of all but 17 companies in the S&P 500," he said.

Apple has let its cash swell because of public tech company myths, he says. "Conventional thinking has led Apple and other large tech companies in having such bloated balance sheets," Einhorn said. "They've accumulated enormous amounts of cash that sit idle on their balance sheet for years on end." He equated the idle, excess cash to an inventory problem.

Tech companies believe they need large rainy day funds to get them through tough times. Executives also think there's no reward for distributing cash, which he called part of "Silicon Valley lore."

And some companies equate their self-importance with the size of their bank accounts, he added.

Plus, tech companies are waiting for the next federal tax holiday, like one in 2004, before bringing foreign money back to the U.S. Of Apple's $137 billion in cash and securities, $94 billion, or 69%, is kept overseas to avoid paying U.S. taxes.

IBM, TI Shareholder-Friendly

Not all tech companies hoard their cash. Einhorn identified IBM (IBM) and Texas Instruments (TXN) as shareholder-friendly firms that return most of their free cash flow to shareholders via dividends and stock buybacks. He says they've been rewarded with price-earnings multiples, net of cash, that are higher than most of their peers with excessive cash balances.

"Finance theory suggests that an unlevered or net-cash balance sheet should be rewarded with higher P-E multiples," he said. "But in practice, the market assigns a discount for this level of overly conservative long-term capital management."

He pointed to Dell (DELL) as an example of cash hoarding that's unfavorable to shareholders.

"Dell's go-private transaction exposes the disingenuous nature of the cash-hoarding rationalization," he said. "Last year, we were large shareholders of Dell. We were told that foreign cash couldn't be repatriated and that domestic cash needed to be saved for strategic acquisitions, financial flexibility and tough times. We found their attitude toward capital allocation to be so unappealing that we sold the stock. We suspect that we weren't the only shareholders who were frustrated. The frustration helped depress the stock."

The stock price decline created an opportunity for founder and CEO Michael Dell to purchase the company using the company's cash-rich balance sheet. Dell is even going to repatriate some "untouchable foreign cash" to make the deal happen, Einhorn said. Dell's willing to use that cash when it works in management's favor but wasn't when it was in the shareholder's favor, he says.